Certainly, inflation is one of many factors that affect housing.
I, for one, think that housing prices in So. Cal. were more or less reasonable in the year 2000. By reasonable, I mean that they were in line with incomes and rents. Does that mean that I expect prices to go back to 2000 levels? The answer (for nominal prices) is no.
The house I’m currently renting may have sold for close to $400K in 2000 or 2001. The current owner paid $900K at the peak in 2005. To arrive at a “year 2000 price” for today, I would take $400K and apply a 35%-45% inflation factor to arrive at a “year 2000 price” that is adjusted for inflation. That would be at lot less than $600K, say $560K today, which I think would be reasonable. (The 35%-45% would be the compounded inflation over the last 7 and a half or 8 years).
That said, I’m not claiming that CPI inflation should be used to determine market price today. It’s only one measure. If interest rates were to increase sharply, of if FHA/Fannie/Freddie were to reduce the maximum amounts they guarantee, then my house could drop to closer to $500K, or less. There are many variables in play, including jobs, salaries, lending standards, etc.
One more thing, in your example, it’s not technically correct to multiply inflation times the number of years. Inflation, like interest, compounds over time. So, in 5 years you have 100*(1.0303^5)-1, where “^” indicates exponentiation and we multiply by 100 to arrive at a percentage.
Also, I don’t believe in the 3.03% inflation rate… my expenses (food, health insurance, food, transportation) have grown a lot faster than 3.03% per year.
Finally, I wouldn’t use 2003 as a base year for comparison. Prices were already detached from reality then. I know, it got worse in 2004-2005 (2006 in some areas like the Inland Empire), but prices were already too high (relative to incomes and rents) as early as 2002.
